LISA BUCKINGHAM: Interest-only mortgages are NOT a mis-selling scandal so don't believe the hype

As the toll for PPI mis-selling rises through £12billion, it is still anyone’s guess exactly where it will end. Quite clearly the banks are in it up to their necks.

However, it is also perfectly plain that ambulance-chasing claims management firms are stoking the fire and making the bill even worse than it should be.

I have sympathy with Lloyds boss Antonio Horta-Osorio, who is arguing that when a jumped-up claim – fuelled by the no-win, no-fee crowd who are forever cropping up on our phones when we know we’ve never bought such a policy – is thrown out by the ombudsman, the £850 charge associated with that should be passed on to the claims management outfit.

Spreading panic: There is little evidence that anyone was misled or ignorant of the risks they were taking, which is why calls for 'mortgage mis-selling compensation' are so worrying

Otherwise there is simply no downside to claims farming and its pernicious outcome.
This is all the more important as the worries over interest-only mortgages intensify.

The spreading panic that these mortgages might have been mis-sold is why the banking industry – bashed, battered and disgraced as it is – should resist calls for any widespread programme of compensation a la PPI.

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Concerns about interest-only mortgages are being fanned by the Financial Services Authority. Ironically it was after the FSA introduced mortgage regulation in 2004 that the most egregiously irresponsible lending really took off, with the regulator standing idly by.

Financial Mail was among those that highlighted homebuyers borrowing ten times their salaries or fraudulently filling out mortgage forms with mythical wage figures that lenders didn’t bother to check.

There is, however, little evidence that anyone was misled or ignorant of the risks they were taking, which is why calls for ‘mortgage mis-selling compensation’ are so worrying.

Now, I have a problem understanding quite how even the most financially illiterate person can take out a 25-year mortgage on an interest-only basis and then think of putting in a mis-selling claim when they discover they cannot repay the underlying loan at the end of the term.

Inherently there is little simpler to understand than a straightforward interest-only mortgage. You borrow £30,000. You pay interest on that for the term of the loan. The £30,000 capital falls due at the end. Full Stop.

I know of no homeowner living in such a bubble that they are entirely oblivious to property prices. As the value of the home increases so does the ability to repay the original loan. And if that means selling up rather than remortgaging then it might be a bit sad but that is not the fault of the lender.

Few people can watch a monthly charge for 25 years on their bank account and not consider what it is doing there. Even fewer will live in a house they own and never consider their ability to pay back the loan.

I’m sure there will be the odd case where someone has been sold an inappropriate interest-only mortgage. Possibly the banks have been less assiduous than desirable in writing to homeowners to alert them to the need to repay the loan.

But if you took a mortgage 25 or so years ago there is a chance the value of your house has risen by more than 400 per cent, quite sufficient to pay back the loan through a remortgage, even taking account of today’s stringent requirements on equity and the recent pressure on older borrowers.

If the consumer champions at the FSA are going to start claiming that this bog standard financial agreement is beyond the ability of most homeowners to understand, we are heading for cloud cuckoo land.

Even people with very little financial experience were quite capable of researching the type of deal best for them and the most competitive rates.
Clearly, sharply falling house prices would make life tougher for borrowers – though they would be market victims not victims of mis-selling.

Many lenders have already started to withdraw interest-only products.
Standing up for consumers’ rights does not mean supporting a blame game where every setback means a hunt for someone to blame or sue.

The most appalling thing would be to see parasitic claims management firms collect yet another stonking payday at the banks’ and taxpayers’ expense for something most sensible people will realise should not be considered a scandal at all.